Financial services: Sliding away

Arnav Pandya, TNNFeb 19, 2002, 03.15pm IST

ONE of the biggest surprises from the quick estimates relating to GDP growth is the figure on the financial services sector. It shows a negative growth for '00-01, the first time since '80-81. This negative growth of 2.2 per cent is even more startling given the fact that the provisional figures for '99-00 put the growth in the financial services sector at 13.4 per cent. A study by the ET Intelligence Group for the period 1970-71 onwards also showed that this area has recorded a compounded annual growth rate of 12 per cent during the '80s and 10.5 per cent during the nineties. The important term in the calculation here is Gross Value Added. Analysts believe that among the GVA components, it's not salaries and rent, but the drop in profits which can explain the phenomenon. But this can be only a part explanation. The financial services sector has quite a few sub-segments. Since the recently released government figures do not give the detailed break-up, most analysts and economists are at a loss in explaining the sudden reversal in fortunes. "We are not able to clearly understand the reason behind this drastic revision. However, our projections for the current year remain at earlier levels and this sector will witness a good rate of growth," said a senior economist with a foreign bank. Financial services now account for around 6 per cent of the GDP. Apart from showing the first negative growth in the last two decades, the figure here is the third lowest since 1970-71. The first occasion when the growth rate has been below the '00-01 figure, was in 1974-75 when the figure was -9.5 per cent and then again in 1979-80 when the growth was -3.45 per cent. A further study of the data available with the Centre for Monitoring Indian Economy from 1995-96 to '00-01 gives a good indication about the select sub-sectors that have not done too well. A word of caution that needs to be kept in mind is that this data is not the exact GDP figure. For example, the data shows financial institutions recording a negative growth of 26.67 per cent in nominal GVA during '00-01. This is the only time that the growth has turned negative in the last six years. The same is true for other categories like non-banking financial companies, which saw a 26.39 per cent drop in nominal GVA during '00-01, which is again the highest drop for the period under consideration. The story was repeated with investment services where the growth rate was a negative 25 per cent during '00-01.